Should management reserve be a part of profit calculation ? Your experience
I work for a software consulting company. When we estimate fixed-price projects we usually have a cost baseline estimate (cost estimate + contingency reserve) and then based on this we can come up with the price for a client which will include our profit.. Let's say the cost baseline is 100K, then the price would be 150K (depending on your business model )...
since there are many projects in one department that is responsible for profitability on a portfolio level, the additional funding (management reserve) if needed, was taken from portfolio profit. The assumption was that Management reserve is not something that is needed for every project, hence you can plan that at the portfolio level.
Now the questions are:
- Should PM plan Management reserve while planning the project?
- Should management reserve be included in project price (e.g. 100K baseline +10 management reserve+50 profit,, then we have 160K project price )
In the US Government space, the Gold Standard that is published by the DoD and adopted by others such as DoE states that MR is held by the contractor. The Contract Price includes the Contract Budget Base plus the fee. The Contract Budget Base includes the Performance Measurement Baseline plus Management Reserve. So that suggests that the MR is calculated and negotiated and becomes part of contractor revenue. If unused during the project, then it would fall to the gross profit line of that project.
However, in practice, I have not seen that. I have never seen an MR line item in a funding document nor have I ever seen it built-in in a cost proposal. That does not mean it does not happen; I just have never seen it. We do build in our contingency into our cost build-up which becomes part of the Performance Measurement Baseline and necessarily hidden from the customer. It falls to profit if unused for certain types of contracts. For other types of contracts, it just produces savings for the customer.